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More On Legal & Compliance

from The Advisor's Professional Library

Updating Form ADV and Form U4
When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.

Recent Changes in the Regulatory Landscape
2011 marked a major shift in the regulatory environment, as the SEC adopted rules for implementing the Dodd-Frank Act. Many changes to Investment Advisers Act were authorized by Title IV of the Dodd-Frank Act.

Chartwell Asset Management Service saw the SEC drop all allegations against it that the agency had filed in July 2011, when it had alleged that Chartwell placed trades on the basis of inside information about Lonza Group's acquisition of Arch Chemicals.

Chartwell was one of three firms charged in the case; it denied any access to insider information and cooperated with the agency. The other firms are Compania Internacional Financiera S.A. (CIF) and Coudree Capital Gestion S.A.

The SEC had accused the three firms of buying 1.04 million shares of Arch Chemicals Inc. before the company, based in Norwalk, Conn., had agreed to a $1.2 billion buyout on July 11. The result netted the firms millions, according to the complaint.

The SEC also has dropped the case against CIF and Coudree, according to a Reuters report, but said that it seeks permission to pursue charges against them if additional information comes to light. In the report, the SEC said that CIF and Coudree had "repeatedly failed" to cooperate in providing evidence.

When the action was dismissed, funds from Charter that had been frozen were also released.

In the new case, Douglas F. Whitman and Whitman Capital were charged by the SEC with insider trading based on material nonpublic information obtained from Roomy Khan, an associate of Raj Rajaratnam of hedge fund advisory firm Galleon Management.

According to the complaint, Khan, who was Whitman’s friend and neighbor, provided Whitman with confidential details about Polycom Inc.’s Q4 earnings for 2005 and Google Inc.’s Q2 earnings for 2007 before public announcements of those figures by the companies. Whitman Capital was alleged to gain nearly $1 million based on those tips.

George Canellos, director of the SEC’s New York regional office, said in a statement, “Whitman engaged in what even he termed ‘slimeball’ activity and together with Khan brought new illicit meaning to the maxim ‘help thy neighbor.’”

The SEC’s complaint, filed in federal court in Manhattan, alleges that the inside information about Polycom and Google used by Whitman is the same information that the agency has previously alleged Khan provided to many of her hedge fund contacts, including Rajaratnam as well as Robert Feinblatt and Jeffrey Yokuty at Trivium Capital.

Khan allegedly not only told Whitman about the Polycom results, but said that they were nonpublic and had come from a Polycom source. Whitman Capital used the information, according to the complaint, to buy up 132,263 Polycom shares over the next two weeks and then sold them all when the information was made public.

Further, Whitman asked Khan at least once more to get inside information from her Polycon contact so they could “short it.” Khan said she feared being caught and Whitman suggested she use Skype to avoid detection. He also said he would stop speaking to her if she wasn’t going to be a “slimeball” anymore. Khan also later provided the Google information, and at Whitman’s insistence identified her source as a member of an investor relations firm that Google used.

Thirty defendants have thus far been charged in Galleon-related enforcement actions, according to the agency, and the investigation is ongoing.